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05 May 2014

Financial World: Security in numbers

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Europe seems ready to bring back securitisation, however carefully controlled so that it is 'good' securitisation rather than the output of 'quants' whose moral compass seemed to be stuck on one setting: personal self-enrichment.

The term "securitisation" normally finds itself next to words like 'toxic' or 'poisonous'. Hardly surprising when AFME data shows that 22 per cent of residential mortgage-backed securities (RMBS) defaulted during the crisis. But – and it is a big 'but' – that number refers to US RMBS, which were the source of immense pain to many banks in Europe, that later had to be bailed out by domestic taxpayers. Over the same period, the default rate for European RMBS was a mere 0.1 per cent and, for SME-backed securities, the rate was just 0.4 per cent through one of the worst economic downturns in decades.

Still, the US experience has scarred global regulators and made them determined that it should never be repeated. But blindly following the global regulatory pack is turning out to have a very bad impact on Europe. This is because Europe’s economy is far more heavily reliant on bank finance than that of the US.

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